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Ironies of Luck

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Summary

Paul Tudor Jones, one of the most successful traders in the world, had a moment of realization in 1993 that he didn't understand why he was so successful. Luck and risk are two sides of the same coin and understanding one requires an appreciation of the other. Risk is well managed in investing, while luck is largely ignored. Investors need to realize the role luck plays in their success and benchmark that a portion of their success was caused by luck and not structurally repeatable. Understanding that luck and risk are an ever-present and normal part of the game helps to identify and focus on what is in their control.

Q&As

What is the irony of investing?
The irony of investing is that risk and luck are different sides of the same coin, but we treat one as critically important, and the other like it doesn’t exist – at least for you, when you succeed.

What are the two sides of the same coin that people in investing need to understand?
The two sides of the same coin that people in investing need to understand are risk and luck.

How does experiencing luck generate false feedback?
Experiencing luck generates false feedback by giving a false feeling that you are in control, because you did something and then got the outcome you wanted.

What does Jeff Bezos talk about that is related to investors handling luck?
Jeff Bezos talks about Amazon’s acceptance of failed projects in relation to investors handling luck.

What are two types of luck and why is structural luck more dangerous?
Two types of luck are a homeless person who wins the lottery and an American born to rich parents. Structural luck is more dangerous because the person enjoying it becomes used to it, which skews their perception of how most of the world operates.

AI Comments

👍 This article is an excellent examination of how luck and risk are intertwined and how important it is to understand and manage both. Morgan Housel does an amazing job of illustrating the nuances of luck and risk with insightful examples.

👎 This article does not provide any practical advice for how to actually manage or quantify luck and risk. It is essentially just a discussion of the nuances of luck and risk without any actionable advice.

AI Discussion

Me: It talks about the importance of understanding luck and risk in investing. It's written by Paul Tudor Jones, who is one of the most successful traders in the world. The article talks about how Paul realized he didn't know why he had been successful over the 17 years prior, and that this lack of understanding of luck and risk could be dangerous.

Friend: That's really interesting. It makes sense that understanding luck and risk is important in investing. What are some of the implications of this article?

Me: Well, one implication is that it's important to recognize that luck and risk are both part of the game. We can't control luck, but we can control how we respond to it. We should also recognize that luck can play a role in our successes, and that it's important to stay humble and recognize that luck isn't always in our favor. It's also important to understand that risk is necessary in order to be successful and that it's important to quantify and manage risk in order to make good, repeatable decisions.

Action items

Take time to reflect on the role of luck in your own successes and failures.
Make an effort to quantify luck in your decision-making process.
Consider how you might respond differently to luck and risk in the future.

Technical terms

Risk: The possibility of suffering harm or loss; a situation involving exposure to danger.
Luck: The force that seems to operate for good or ill in a person's life, as in shaping circumstances, events, or opportunities.
Quantify: To express or measure the quantity of something.
VCs: Venture capitalists, investors who provide capital to startup companies and small businesses with perceived long-term growth potential.
Disclose: To make known or reveal (something previously kept secret or private).
Risk-Adjusted Returns: A measure of the return of an investment compared to its risk.
Luck-Adjusted Returns: A measure of the return of an investment compared to its luck.
Ego: A person's sense of self-esteem or self-importance.
Narrative: A spoken or written account of connected events; a story.
Competitive Pursuits: Activities that involve competing with others to achieve a goal.
Stress: A state of mental or emotional strain or tension resulting from adverse or demanding circumstances.
Challenge: A call to take part in a contest or competition.
Discounting: The act of reducing the value of something.
Leverage: The use of credit or borrowed funds to increase one's speculative capacity and increase the potential return of an investment.